Is the European Union in Crisis?

Polish Prime Minister Marek Belka says the inability of the EU summit to come
to a budget compromise lies squarely in the selfishness of the wealthy EU states.

The EU has long been a vehicle to shift money from "wealthy" countries such
as Germany and the Netherlands to "poorer" countries. German chancellor Schröder
said: "The history of the EU is a series of compromises paid for by Germany." At
the same time, some of the newer members in Eastern Europe have extremely aggressive
tax policies, with some charging no income taxes at all. There is nothing wrong
with free market competition and offering tax incentives; but conversely, "wealthy" states
should be forgiven to think that there is no need to subsidize the exporting
of jobs to these countries.

And guess what: the "wealthy" EU states have no money to spend. It comes as
no surprise that no budget deal is reached. While much of the media calls this
embarrassing, it is not so different from national governments anywhere in
the world not agreeing on a budget.

Tony Blair says "we need a fundamental reform of how we spend money in the
EU." He points out that the EU will continue to spend 7 times as much on agricultural
subsidies in 2013 as it spends on research, technology and education. What
Blair highlights is important: the EU needs to find a way to operate in the
21st century with 25 member states or more. It needs to focus on how to deal
with the challenges of the future. Breaking with "business as usual" is a healthy
wake up call. The greatest challenges ahead include how to deal with globalization,
how to deal with the aging workforce, and how to deal with mass unemployment.

If the French want to pursue a protect their welfare system, while Eastern
Europe and Britain adapt to changing requirements in the world, they should
all be allowed to pursue their paths. Each country has to be held responsible
for the consequences of their actions. Most importantly, this means that one
country that is fiscally irresponsible must not be bailed out by another. We
expect the yield spread (the difference in interest rates paid on debt) between
fiscally responsible countries, such as Finland, and less responsible countries,
such as Italy, continue to widen. This does not mean that the Euro is in jeopardy,
but it has to be made clear who is ultimately responsible for the debt, and
the responsibility must lie with the national governments. In the U.S., different
states also pay different interest rates on their debt. In California, Schwarzenegger
decided to pledge sales tax revenue as collateral to its new debt issues, and
was able to drastically lower the cost of borrowing in a state that was on
the verge of bankruptcy.

If anything, we see the lack of a budget deal in the European Union as a positive
sign on government spending. If there is no deal, less money will be spent.
Governments need to adjust their spending habits to the economic environment
-- countries like Germany and France continue to have deficits exceeding 3%
of GDP as agreed in the European 'stability pact.' European politicians may
not like Blair, but someone questioning the norm is a good change of pace.
Europeans want reform, and they want to be involved - Blair might end up being
a catalyst for change after all.

What are the implications for the Euro? Again, we do not see this as a crisis,
neither do we see this as something entirely unexpected. The current turmoil
may keep a lid on the Euro's rise, but eventually, the pressures caused by
the current account deficit in the U.S. on the dollar, in our view, outweigh
the temporary uncertainties in Europe. In the meantime, gold, the only currency
with intrinsic value, is shining and has reached new highs versus the euro.

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard
money, macro trends and international investing. He is considered an authority
on currencies.

The Merk Absolute Return Currency Fund seeks to generate positive absolute
returns by investing in currencies. The Fund is a pure-play on currencies,
aiming to profit regardless of the direction of the U.S. dollar or traditional
asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies
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that may include, but are not limited to, the currencies of China, Hong Kong,
Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea,
Taiwan and Thailand.

The Funds may be appropriate for you if you are pursuing a long-term goal
with a currency component to your portfolio; are willing to tolerate the risks
associated with investments in foreign currencies; or are looking for a way
to potentially mitigate downside risk in or profit from a secular bear market.
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The Funds primarily invest in foreign currencies and as such, changes in
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price of the Funds' shares. Investing in foreign instruments bears a greater
risk than investing in domestic instruments for reasons such as volatility
of currency exchange rates and, in some cases, limited geographic focus,
political and economic instability, and relatively illiquid markets. The
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This report was prepared by Merk
Investments LLC, and reflects the current opinion of the authors. It
is based upon sources and data believed to be accurate and reliable. Merk
Investments LLC makes no representation regarding the advisability of investing
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